Small steps and giant leaps: Australia moves closer to implementing far-reaching merger reform - M&A/Private Equity

In the year since Gina Cass-Gottlieb's appointment as Chair of the Australian Competition and Consumer Commission (ACCC), there has been much speculation about her position on the merger reform proposals of her predecessor Rod Sims released in August 2021. With her speech to the National Press Club, the Chair has now pinned her colours to the mast and endorsed the ACCC's long-held view that the Australian merger control regime needs reform.¹

The ACCC's latest proposals include a range of changes to Australia's merger control regime, including:

introduction of a mandatory and suspensory merger filing regime in which the ACCC would not clear a transaction unless it was "positively satisfied" that the deal would not substantially lessen competition, supplemented by a discretionary 'call in' power;
prescriptive upfront information requirements;
a 'notification waiver' system for straightforward transactions; and
changes to the substantive legal tests to address 'entrenched' market power and increase focus on data and technology assets, serial acquisitions and the acquisition of potential competitive threats.

While the shift to a mandatory filing system was widely anticipated, the ACCC has moved further than expected in proposing substantive legal changes that shift the burden to prove a transaction is not likely to substantially lessen competition onto transaction parties. Key details remain limited, but the revised proposals, which are likely to receive broad political support, signal a major overhaul of Australian merger review processes and a shift to more restrictive merger control.

Context to the Australian merger reform debate

The ACCC's sights have been set on reforming Australia's merger control laws for some time. Former Chair Rod Sims was a vocal proponent for change during his tenure, and in August 2021, proposed reform options to "start a debate". Since Ms Cass-Gottlieb's appointment as ACCC Chair in March 2022, she has signalled her support for an updated merger control regime, but has avoided detailed comment on the form.

In a 12 April 2023 speech, she confirmed her support for the "broad direction" of previous proposals, and identified the following factors as supporting the need for merger reform:

the need for more robust and effective merger control to deal with cost of living pressures resulting from supply chain constraints, geopolitical issues, the energy transition and the growing role of 'gatekeeper' technology companies in the everyday lives of Australians;
limitations in the current 'enforcement-based model' for merger control, under which the ACCC is required to approach the Court to prevent or unwind a transaction, which is said to have shifted the balance "too much toward avoiding the risk of opposing a benign merger, at the expense of increasing the risk of enabling anti-competitive mergers"; and
private parties "pushing the boundaries of the informal regime" by providing late, incomplete or incorrect information to the ACCC, threatening to complete transactions before the ACCC has finalised its reviews, and notifying the ACCC after its international counterparts. In this respect, a mandatory and suspensory regime is said to be necessary to bring the Australian process into line with that of most international agencies (including in China, the European Union, Germany, Japan and the United States).

There remain valid questions about whether those concerns are overstated. In particular, the current process is generally efficient and well-understood, there is limited evidence of regulatory gaming by merger parties and it is arguable that the ACCC's dismal merger litigation record is due in large part to poor case selection and prosecution rather than an unduly high legal threshold. Regardless, the ACCC's revised proposals seem likely to move quickly past that debate given political appetite for reform - noting the concerns about over-concentration of Australian industries and support for merger reform from key government figures including the Treasurer and the Assistant Minister for Competition.

The ACCC's revised proposals

The following table shows how the ACCC's revised proposals compare to the current Australian merger control regime and its August 2021 proposals.

	Current regime	August 2021 proposals	Revised proposals
_{Type of regime}	_{Voluntary and 'enforcement-based' model}	_{Mandatory above specified thresholds}	_{Mandatory above specified thresholds}
_{Bar on closing}	_No	_Yes	_Yes
_{Notification thresholds}	_{None, but parties are encouraged to notify if: (i) the parties' products are either substitutes or complements; and (ii) the merged firm will have a post-transaction market share of greater than 20% in the relevant market/s}	_{No detail provided}	_{Limited detail provided - likely to focus on the size of the transaction, the size of the business being acquired globally and/or within Australia, or a combination of those factors}
_{'Call-in' power}	_{Effectively yes, the ACCC can initiate independent (ex officio) investigations}	_Yes	_Yes
_{Notification waiver system}	_{No, but a confidential pre-assessment process is available, pursuant to which an ACCC clearance can typically be obtained within around 3-6 weeks}	_{Yes, but no detail provided}	_{Yes, but limited detail provided. The notification waiver would likely exempt the parties from making a full formal notification. The ACCC expects that the 'overwhelming majority' of transactions would be dealt with in this way, as under the current pre-assessment process}
_{Prescriptive information requirements}	_No	_{Yes, but no detail provided}	_{Yes, but no detail provided}
_{Legal test}	_{An acquisition of shares or assets that has the effect or likely effect of substantially lessening competition (SLC) is prohibited}	_{The same SLC test, but the ACCC proposed: (i) changing the meaning of the word "likely" from a "real commercial likelihood" to a "possibility that is not remote"; and (ii) deeming transactions by corporations with substantial market power to SLC if they "entrench, materially increase or materially extend that market power"}	_{The ACCC proposes the same SLC test, with an express clarification that "entrenching, materially increasing or materially extending a position of substantial market power" constitutes an SLC}
_{Statutory 'merger factors' that must be taken into account in applying the SLC test}	_{Merger factors include the current level of competition in a market, concentration levels, barriers to entry, the level of import competition, and the availability of substitutes}	_{Revising the merger factors to focus on the structural conditions for competition that are changed by the transaction, and introducing merger factors to address the loss of potential competitive rivalry and enhanced access to or control of data, technology or other significant assets}	_{Expanding the merger factors to include: (i) the loss of actual or potential competitive rivalry; (ii) increased access to, or control of data, technology or other significant assets; (iii) whether the acquisition is part of a series of relevant acquisitions; and (iv) whether the acquisition entrenches or extends a position of substantial market power.}
_{Separate, sector-specific merger control rules}	_No	_{Yes, for digital platforms}	_No
_{Alternative merger authorisation process, based on a net public benefit test}	_{Yes, the ACCC can grant merger authorisation if it is satisfied that either: (i) the transaction would not be likely to SLC; or (ii) the likely public benefit resulting from the transaction outweighs the likely resulting public detriment (including any harm to competition)}	_{Proposal to repeal the merger authorisation process}	_{Proposal to repeal the current alternative merger authorisation process, but enable merger parties to seek clearance on public benefit grounds through a secondary application if they are refused clearance on competition grounds}
_{Appeal options}	_{Seeking a declaration of no contravention from the Federal Court}	_{ACCC decisions would be subject to limited merits review by the Tribunal}	_{ACCC decisions would be subject to review by the Tribunal (although it was unclear from the Chair's speech whether this is full or limited merits review). The Federal Court could still hear applications for declarations of non-contravention}

Implications

Our initial views on the ACCC's revised proposals include the following:

Generally more restrictive merger control signalled - The ACCC's slightly more restrained approach in its latest proposals is welcome, particularly the rejection of the unworkable proposals to change the meaning "likely" to a "possibility that is not remote" and to deem transactions by corporations with substantial market power to substantially lessen competition. However, the updated proposals still signal an intended shift to more restrictive merger control. In her speech, the Chair complained about the difficulties the ACCC faces in seeking to prove that an SLC is likely, which resulted in the "default position" being to clear transactions. She also made clear that, under the new regime, the ACCC would not clear a transaction unless the ACCC is "positively satisfied" that there is no likely substantial lessening of competition. This clearly indicates the ACCC intends to shift the challenges of satisfying the SLC test onto merger parties and move to a default position of 'opposition' rather than 'permission'. It is unclear whether this shift in approach would be codified in the legislation or how it would be applied in practice, but it would be consistent with the position under the current merger authorisation process. In an application of that type, the ACCC needs to be "satisfied" that a transaction would not SLC or would result in a net public benefit before it can authorise.
Timing implications - For most deals that would previously have been filed with the ACCC, the new process will likely make little difference to overall deal timing and execution risk. However, for a range of substantively simple transactions for which a decision would have previously been taken not to file, the new process likely implies delays of at least a month even assuming an ACCC waiver is granted - increasing transaction costs, deal risks and complexity in competitive sales processes. While dependent on the ultimate filing thresholds, process impacts are likely to be felt keenly by large acquirers (who are more likely to trip thresholds) and by serial acquirers such as private equity (PE), retail, industrial property and health, aged and child care players.
Increased emphasis on tech, PE deals and potential competition theories - The proposed changes to the merger factors, with the exception of the reference to "entrenching, materially increasing or materially extending a position of substantial market power" to address transactions that may enhance the position of a dominant firm, are unlikely to have a dramatic effect on merger review. The ACCC already considers potential competition, access to data and 'serial' or 'creeping' acquisitions in its merger review processes. However, the revised proposals will increase emphasis on those issues and ensure that the Tribunal will place weight on these factors in its review of ACCC decisions. The focus on 'creeping' or 'serial' acquisitions has not been a core focus of the ACCC for several years. However, the ACCC made clear this change was particularly targeted at the acquisition strategies of major digital platforms and may also be directed towards PE, given the recent focus on PE 'roll-up' transactions in both the US and UK.
Scrutiny of digital platform acquisitions likely to continue and widen - The ACCC's focus on 'creeping' or 'serial' acquisitions in digital markets, the new legal test (incorporating "entrenching, materially increasing or materially extending a position of substantial market power"), and the retention of the plan to incorporate access to data and potential competition in the merger factors, clearly signals a significantly interventionist approach to digital platform transactions. This is consistent with the ACCC's ongoing focus on the expansion strategies of the major platforms in the ACCC's current 7th round of its Digital Platform Services Inquiry regarding digital platform ecosystems. However, it does not appear that the ACCC will pursue a set of separate and distinct rules for digital platform acquisitions which it proposed in August 2021.
Practical effect dependent on thresholds and practical requirements - The extent of the practical impact of the updated proposals will depend heavily on matters on which the ACCC has not provided any detail, including: (i) notification threshold levels; (ii) information requirements for filings; and (iii) how the ACCC chooses to administer its notification waiver system. The ACCC will need to select appropriate monetary thresholds that do not over capture benign transactions and stretch its ability to resource the reviews of the substantially increased volume of notifications that it will likely receive. Clear guidance from the ACCC will also be important to minimise the uncertainty created by the new process, including regarding the calculation of revenue, asset and/or transaction values for threshold purposes, review processes, information requirements, and how it will exercise waivers and call-in powers.
Importance of proper appeal processes - It is unclear from the ACCC's speech whether the ACCC proposes that merger parties would only be able to seek limited merits review of ACCC decisions by the Tribunal (such that any review would be limited to the material before the ACCC), or whether a full merits review process is contemplated. A proper process for judicial oversight of ACCC merger decisions is critical and a limited merits review erodes important safeguards against over-enforcement and poor decision-making. Additionally, merger parties are placed at a disadvantage because they are unable to properly test third parties' submissions and evidence. The ACCC can examine the parties' or complainants' executives on oath during the merger review process, but merger parties do not have a reciprocal right. Merger parties are also unable to submit new evidence to the Tribunal save for in very limited circumstances. Full merits review by the Tribunal would be fairer and improve the process, and would be unlikely to substantially increase costs or timelines.
Continuing role for the Federal Court - In a further change to its August 2021 proposals, the ACCC seems to contemplate that parties could apply to the Federal Court for a declaration that a transaction would not be likely to SLC (although the circumstances in which this would be an attractive option seem narrow). The ACCC also considers that the role of the Federal Court in considering merger enforcement matters would continue for transactions that do not trip the notification thresholds.

The timeline in which the ACCC's proposals are likely to be considered and implemented by the Government remains unclear. What is clear, however, is that the ACCC will push hard for these reforms and that the political environment is now far more sympathetic to the ACCC's position than it was in August 2021 when the ACCC first floated reform proposals.

Footnote

1ACCC speech, 'The role of the ACCC and competition in a transitioning economy - Address to the National Press Club 2023', 12 April 2023.

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